Merrill Lynch downgrades Burberry after results miss forecasts

Bank of America Merrill Lynch downgraded Burberry to 'neutral' and cut its target price to 1,500p after the fashion group's first-half sales fell short of forecasts.

The FTSE 100 group reported first-half sales of £1.105bn, flat at constant exchange rates and 5% below consensus estimates, with the miss largely attributed to like-for-like sales being down 4% in the second quarter, well short of the expected 5% growth.

Burberry management have been quick to kickstart cost cutting to preserve profits but while full-year earnings before interest and tax of £445m was confirmed as still on target, in line with consensus, Merrill said the assumption of a return of mid-single digit was "too optimistic".

"We continue to see ongoing risk to luxury sector earnings and valuation, of which Burberry is not immune despite its attractive exposure to digital."

Merrill lowered its 2017 PBT forecast by 12% to £420m, 16% below consensus, based on 7% retail revenue growth, flat underlying retail/wholesale margins and a return of performance related costs of £20m in 2017.

"While we do not question Burberry’s brand equity, strategy or execution," analysts concluded, "the trading environment is tough and only amplified by its geography mix."

The house view was that China risks remains skewed to the downside and the sector specialists continued to remain cautious on the luxury goods sector, the broker concluded.